Question 1

Which of the following does NOT appear in the current account part of the balance of payments?

Accepted Answer

A loan from a bank is a capital account transaction, not a current account transaction. The current account includes the trade balance (exports and imports of goods and services), income earned by domestic residents from foreign investments, income earned by foreigners from domestic investments, and unilateral transfers (such as foreign aid).

Question 2

The account that shows international transactions that involve the purchase or sale of assets is called the

Accepted Answer

The financial account is the account that shows international transactions involving the purchase or sale of assets, such as stocks, bonds, real estate, and foreign currencies. The current account, on the other hand, shows transactions involving goods, services, and income, while the trade balance is a component of the current account that shows the difference between a country's exports and imports of goods. The balance of payments is a broader concept that includes both the current account and the financial account, as well as other transactions such as transfers and official reserves.

Question 3

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

Accepted Answer

A sterilized foreign exchange intervention involves offsetting any changes in the domestic money supply with corresponding adjustments in open market operations, thus leaving the monetary base unchanged.

Question 4

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will depreciate.

Accepted Answer

An unsterilized purchase of foreign assets by a central bank increases the domestic money supply because the central bank is injecting money into the economy to buy these assets. This increase in money supply typically leads to a depreciation of the domestic currency as more of the currency is available.

Question 5

The account that shows a country's current international transactions (that is,transactions that do not involve the purchase or sale of financial assets)for a given year is called the

Accepted Answer

The current account of balance of payments is the account that shows a country's current international transactions, which include trade in goods and services, income from investments, and unilateral transfers. The trade balance only includes goods, while the capital account only includes financial transactions.

Question 6

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will decrease and the domestic currency will ________.

Accepted Answer

An unsterilized sale of foreign assets by a central bank reduces the domestic money supply because it withdraws domestic currency from circulation. This decrease in money supply leads to an appreciation of the domestic currency.

Question 7

Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will

Accepted Answer

The answer of Everything else held constant,if a central bank...

Question 8

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base,everything else held constant.

Accepted Answer

The answer of A central bank ________ of domestic currency...

Question 9

If the United States has a current account deficit with England of $1 million,and the Bank of England sells $1 million worth of pounds in the foreign exchange market,then England ________ $1 million of international reserves and its monetary base ________ by $1 million.

Accepted Answer

When the Bank of England sells $1 million worth of pounds in the foreign exchange market to balance the current account deficit, it is essentially exchanging pounds for dollars. This action increases England's international reserves by $1 million (as it now holds more foreign currency) and also increases its monetary base by the same amount, as the sale injects additional currency (dollars converted to pounds) into its economy.

Question 10

Everything else held constant,if a central bank makes an unsterilized sale of foreign assets,then the domestic money supply will ________ and the domestic currency will ________.

Accepted Answer

An unsterilized sale of foreign assets means the central bank is selling foreign currency reserves without simultaneously conducting an offsetting transaction in the domestic market, which leads to a decrease in the domestic money supply. According to the basic principle of supply and demand, a decrease in the money supply will cause the value of the domestic currency to appreciate. Therefore, the correct answer is option C: decrease; appreciate.

Question 11

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will increase and the domestic currency will ________.

Accepted Answer

An unsterilized purchase of foreign assets by the central bank leads to an increase in the money supply in the domestic economy, as the payment for the foreign assets is made in domestic currency. This increase in the money supply leads to a depreciation of the domestic currency as the demand for it decreases. Therefore, the correct answer is option B, purchase and depreciate.

Question 12

Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant,this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base.

Accepted Answer

When the Bank of Japan buys U.S. dollar assets, it increases the foreign assets held by the Federal Reserve. This transaction also increases the U.S. monetary base because it involves the exchange of yen for dollars, effectively injecting more dollars into the U.S. economy.

Question 13

Everything else held constant,if a central bank makes an unsterilized purchase of foreign assets,then the domestic money supply will ________ and the domestic currency will ________.

Accepted Answer

When a central bank makes an unsterilized purchase of foreign assets, it pays for these assets with its own currency, thereby increasing the domestic money supply. This increase in money supply typically leads to a depreciation of the domestic currency because there is now more of the domestic currency available relative to other currencies.

Question 14

The difference between merchandise exports and imports is called the ________ balance.

Accepted Answer

The difference between merchandise exports and imports is called the trade balance. The current account includes trade in goods and services, income flows, and unilateral transfers, while the capital account shows the transfer of assets or financial capital between countries. Official reserve transactions involve changes in central banks' foreign currency reserves.

Question 15

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base,everything else held constant.

Accepted Answer

A central bank's sale of domestic currency in the foreign exchange market leads to an equal increase in its international reserves and the monetary base.

Question 16

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

Accepted Answer

An unsterilized foreign exchange intervention refers to the central bank allowing the purchase or sale of domestic currency to affect the monetary base. In this case, there is no offsetting transaction to neutralize the impact on the money supply. This can potentially impact domestic interest rates and inflation.

B) A sterilized foreign exchange intervention refers to the central bank conducting an offsetting transaction, such as buying or selling government bonds, to neutralize the impact of the foreign exchange intervention on the money supply.

C) An exchange rate feedback rule is a monetary policy rule where the central bank adjusts interest rates according to deviations in the exchange rate from a target level.

D) A money neutral foreign exchange intervention refers to the central bank conducting an intervention that has no impact on the money supply, such as buying or selling foreign currency in exchange for domestic currency.

Question 17

Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets. Everything else held constant,this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base.

Accepted Answer

When the Bank of Japan buys yen-denominated assets with U.S. dollar assets, it reduces the foreign assets held by the Federal Reserve. This transaction also decreases the U.S. monetary base because it involves the exchange of U.S. dollars for foreign assets, effectively reducing the amount of U.S. dollars in circulation.

Question 18

Everything else held constant,if a central bank makes a sterilized purchase of foreign assets,then the domestic currency will

Accepted Answer

A sterilized purchase of foreign assets by a central bank involves buying foreign assets and simultaneously conducting domestic operations to offset the increase in the money supply. This means the domestic currency's value is not directly affected by such transactions, as the potential impact on the currency value through changes in the money supply is neutralized.

Question 19

Everything else held constant,if a central bank makes an unsterilized ________ of foreign assets,then the domestic money supply will ________ and the domestic currency will appreciate.

Accepted Answer

An unsterilized sale of foreign assets by a central bank reduces the domestic money supply because it involves selling foreign assets in exchange for domestic currency, which is then removed from circulation. This reduction in the money supply leads to an appreciation of the domestic currency.

Question 20

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention

Accepted Answer

Sterilized interventions do not have any impact on the exchange rate in the short or long run as they do not affect the monetary base or money supply. Therefore, the correct choice is D - has no effect on the exchange rate.

Quiz 18: The International Financial System

Which of the following does NOT appear in the current account part of the balance of payments?

The account that shows international transactions that involve the purchase or sale of assets is called the

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called

Everything else held constant,if a central bank makes an unsterilized of foreign assets,then the domestic money supply will and the domestic currency will depreciate.

The account that shows a country's current international transactions (that is,transactions that do not involve the purchase or sale of financial assets) for a given year is called the

Everything else held constant,if a central bank makes an unsterilized of foreign assets,then the domestic money supply will decrease and the domestic currency will .

Everything else held constant,if a central bank makes a sterilized sale of foreign assets,then the domestic currency will

A central bank of domestic currency and corresponding of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base,everything else held constant.

If the United States has a current account deficit with England of $1 million,and the Bank of England sells $1 million worth of pounds in the foreign exchange market,then England $1 million of international reserves and its monetary base by $1 million.

Everything else held constant,if a central bank makes an unsterilized sale of foreign assets,then the domestic money supply will and the domestic currency will .

Everything else held constant,if a central bank makes an unsterilized of foreign assets,then the domestic money supply will increase and the domestic currency will .

Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant,this transaction will cause in the foreign assets held by the Federal Reserve and in the U.S. monetary base.

Everything else held constant,if a central bank makes an unsterilized purchase of foreign assets,then the domestic money supply will and the domestic currency will .

The difference between merchandise exports and imports is called the ________ balance.

A central bank of domestic currency and corresponding of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base,everything else held constant.

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base,it is called

Suppose that the Bank of Japan buys yen-denominated assets with U.S. dollar assets. Everything else held constant,this transaction will cause in the foreign assets held by the Federal Reserve and in the U.S. monetary base.

Everything else held constant,if a central bank makes a sterilized purchase of foreign assets,then the domestic currency will

Everything else held constant,if a central bank makes an unsterilized of foreign assets,then the domestic money supply will and the domestic currency will appreciate.

Because sterilized interventions mean offsetting open market operations,there is no impact on the monetary base and the money supply,and therefore a sterilized intervention